Economics: science or philosophy?

A topic that I have only recently started to delve into is the way in which economics is viewed. Is it a science similar to physics that follows strict laws and forces that can be measured and predicted with the use of mathematical models and equations, or is economics more of a philosophy where theoretical models are used to compare how things are compared with how they should be.

I used to believe that economics was an exact science that followed certain rules and principles, after all that is how the majority of my economics classes have taught the subject. But according to a lot of the sources I read (especially the ones written after the 2008 financial crisis) when researching the economics profession tend to say economics needs to return to more of a philosophical viewpoint. They argue that while mathematical models can be used in microeconomic predictions, they really don't apply when viewing the economy as a whole.

I can agree with this from my economics education so far. Each section that is covered in everyone of my classes is really only looking at a small part of the economy, even in my macroeconomics class we would discuss a single market in the economy like the labor market, or the goods market, etc, and even during the discussion of one particular markets a lot of assumptions had to be made in order for the given model to work. The argument that philosophical economists make is because economics is viewed as similar to an exact science the predictions it makes are taken very literally. And when these predictions are incorrect like they were in 2005, the consequences can be devastating. Economics really cant be viewed as an exact science because so much of it is based on human behavior and what people will chose to do with their money in this situation or that situation and sometimes that really just cant be predicted.

Good source comparing economics as a science or a philosophy.
http://plato.stanford.edu/entries/economics/

how the global meltdown is changing the economics profession

          Continuing from my last post on what happened during the 2008 global financial crisis, I will now discuss how the economics profession has changed in response to the 2008 crisis, and how it will continue to be affected by the crisis in a way similar to economics after the Great Depression of the 1930s.

The crisis of 2008 in addition to impacting all elements of the global economy has also impacted my future discourse of economics through the enacting of new government regulations, and new methods of prediction intended to stop this level of crisis from occurring again. According to the Journal of Economic Perspectives, Congress passed a major reform of the financial industry in 2010; the Dodd-Frank Wall Street Reform and Consumer Protection Act which was aimed at regulating the unregulated, protecting the consumer, and reversing the perverse incentives that guided the actions of sub prime lenders and investors, credit rating agencies, market-based financial intermediaries, and others (5). Finally the Large Institution Supervision Coordinating Committee a multidisciplinary committee was created to oversee the supervision of a variety of institutions. The committee uses horizontal, or cross-firm, evaluations to monitor interconnectedness and common practices among firms that could lead to greater systemic risk. It also uses additional and improved quantitative methods from economists such as new Financial Condition Indexes or FCI’s that include a more complete range (up to 45) of economic variables for evaluating the performance of firms and the risks they may pose.

The 2008 financial crisis will affect economic policy making and the predictions of economists for generations to come in a similar way to how the Great Depression did up until even recently. According to George F. DeMartino Professor and Co-Director of the MA in Global, Finance, Trade and Economic Integration and author of The Economist’s Oath: On the Need for and Content of Professional Economic Ethics, “As I see it, the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth … the central cause of the profession’s failure was the desire for an all-encompassing, intellectually elegant approach that also gave economists a chance to show off their mathematical prowess” (97). Demartino believes that the entire discourse of economics needs to change to make an effort to produce economists that think more ethically not just mathematically and this change needs to begin at the undergraduate degree level. Instead of teaching economics simply by focusing on graphs and equations professors can explore the value judgments that appear in all economic theories and methods and encourage their students to consider whether this or that set of values represents a better foundation for economic theory and policy (212).

In conclusion the financial crisis of 2008 has been and will continue to be a monumental trend for the discourse community of economists. I believe the lessons learned of needing more regulation and oversight instead of a purely free market capitalist system could have only been learned the hard way through a crisis like we experienced. I believe because of the scale of the crisis the regulations put in place by the government will remain, and remain effective unlike legislation of the past which is repealed soon after it is brought in. I also believe that because I am currently still pursuing my degree I can tailor my education to include ethical economic practices and economic theory and try to view economics on a more philosophical level, not just the mathematical one in which it is primarily taught. And because of that I am eager about my future as an economist, I have always thought of economics as more of a social science then a physical science and as such I can position myself uniquely when I complete my education and I believe I will possess more of the traits employers will be looking for as a result of the crisis.

2008 global financial meltdown: What happened?

Up until now I have spoken of the need to learn about what economists actually do in their day to day jobs and what type of people they are. Now I am going to shift gears and talk about another potential problem you may face when transitioning from the academic world of economics to the career world of economics, and that is the issue of new trends. It is very possible that the economics profession you learned about in school could have undergone a change and as a result is now different from the profession you are trying to enter. Because of this it is important to stay up to date on new trends occurring in economics while you are still in school so you can adapt your education to meet the new demands of your future profession. The financial crisis of 2008 has already changed and will continue to change both economics as a whole and the careers of economists.

         First it is necessary to discuss what caused the financial crisis of 2008, and as Gary B. Gordon professor at the Yale School of Management and Researcher on the US Financial Crisis Inquiry Commission points out, “U.S. financial history is replete with banking crises and the predictable political responses. Most people are unaware of this history, which we are repeating”. (Gordon 1) This particular crisis (2008) was caused mainly by the belief that regulation of the financial system was burdensome and unnecessary, that financial institutions were capable of self-regulation, and that regulators should not interfere with investment practices that were profitable. Large commercial banks, such as Wachovia that had significant exposure to risky mortgage assets were subject to panics and subsequent “runs” by creditors and depositors. The Federal Reserve realized far too late the systemic danger inherent to the unregulated over-the-counter (OTC) market and did not have the information needed to act.

         The financial crisis in a broad sense can be defined as occurring from mid-2007 to June 2009 which marked the official end of the 18 month long recession. Beginning when housing prices started to decline after their 2005 peak, mortgage backed financial securities (allow ownership of underlying asset without taking possession meaning easily tradable aka liquid) which in many cases were securities based on subprime residential mortgages began to experience huge losses. According to the final report of the Financial Crisis Inquiry Commission, by early 2008, losses on these securities were estimated to be on the order of $500 billion dollars (53). This lead to a series of runs on financial institutions specifically the shadow banking system which unlike runs on consumer banks occur without any public or media knowledge. The run occurred because the institutions short term liabilities that were in the form of short-term borrowing, like repurchase agreements (or repos), which used mortgage-backed securities as collateral could no longer back the same amount of borrowing due to the reduced value of the mortgage backed securities. This resulted in deleveraging

         As devastating as the effects of the collapse of the housing market sound that was really only the beginning and could have been dealt with by the FED. The crisis really occurred in September of 2008 when Lehman Brothers filed for bankruptcy, Merrill Lynch was taken over and within 24 hours AIG was bailed out by the government. This caused widespread fear from creditors and investors that many other large financial institutions were on the verge of collapse (353). CEO of Morgan Stanley told the FCIC that Morgan Stanley and other institutions faced a “classic run on the bank” and “the entire investment banking system came under siege”. Most striking were the statements made to the FCIC by JP Morgan CEO Jamie Dimon who said, “The markets were very bad, the volatility, the illiquidity, some things couldn’t trade at all, I mean completely locked, the markets were in terrible shape”(353). Ben Bernanke the current chairmen of the FED and expert on the Great Depression believed that September and October of 2008 marked the worst financial crisis in global history even including the Great Depression (354) The cause of these company failures did stem from the loss in value of the mortgage securities and collateral but it is the greed, extensive risk taking and the manipulation of financial instruments that is most concerning. (371-386)



Here is the link to the final report of the Financial Crisis Inquiry Commission, which I reference several times in this post and is a accurate, understandable account of how the 2008 financial crisis unfolded.
http://fcic.law.stanford.edu/report

An example of a great economist: Joesph Stiglitz

As I stated in my previous entry if you are considering the career of an economist or really any career for that matter, it is really important to learn what it is like to work in the the career itself as there may be a lot of aspects to that career that you were unaware of while in school. In addition to the generic skills-set of an economist that I spoke about earlier I feel it is also useful to give more of a case study of one persons journey from a student to a world renowned economist. Here is part of an ethnography I wrote on Joseph Stiglitz  the 2001 Economic Nobel Laureate.

Joseph Stiglitz was born in Gary, Indiana, USA in 1943, a town that suffered from the usual difficulties common to industrial cities in postwar America including poverty, periodic unemployment and massive racial discrimination. Stiglitz recalls that he grew up in a household where political discussion was commonplace, molding him into an “inquiring youngster” who began to wonder about the economic and social problems around him. This background became significant as Stiglitz began his studies in economics. He was taught theoretical economics which predicted outcomes very different from the reality he had seen growing up: he knew that full employment was not the norm, that poverty was endemic in even the world's richest society and therefore that there might be reasons to suspect the economic models of the day were incorrect.

     Stiglitz attributes the development of his capacity to question to both his family's influence and the kind of schooling he had. From 1960 to 1963 he attended Amherst College in New England, a liberal arts college where he learned “that what mattered most was asking the right question -having posed the question well, answering the question was often a relatively easy matter”. Stiglitz also took much enjoyment from his involvement in debate at Amherst College, he says it was the extra-curricular activity that he enjoyed the most and that it helped shape his interest in public policy. From a wide range of possibilities Stiglitz eventually decided to major in economics at Amherst. He recalls, “I thought it provided an opportunity for me to apply my interests and abilities in mathematics to important social problems, and somehow, I thought it would also enable me to combine my interest in history and writing. I wanted it all and economics seemed to have it all” (Nobel Interview, 2001).

     Stiglitz actually left Amherst without graduating, although the college awarded him a BA in 1964. He opted for graduate studies at the Massachusetts Institute of Technology (MIT). Stiglitz summaries the differences in the education he received at Amherst and MIT, “Amherst was pivotal in my broad intellectual development; MIT in my development as a professional economist.” Also, according to Stiglitz “The particular style of MIT economics suited me well - simple and concrete models, directed at answering important and relevant questions”(Nobel 2001). He was awarded a PhD from MIT in 1966. After a year at MIT, Stiglitz took up an opportunity to edit Samuelson's collected papers. In 1965-66, having been awarded a Fulbright Fellowship, Stiglitz attended the University of Cambridge, UK where he was tutored by Joan Robinson and then by Frank Hahn. He received an MA from Cambridge in 1970. In the same year Stiglitz was awarded an MA by Yale University; in 1976 he was awarded an MA by the University of Oxford, UK. Stiglitz is not only famous for being an economist but also for being an extraordinary economic educator, his academic highlights include: assistant professor at MIT, assistant and then associate professor at the Cowles Foundation, Yale University, Tapp Research Fellow at Gonville and Caius College, senior research fellow at University College, Nairobi, and appointed Professor of Economics at Yale, a post held until 1974. From 1974 to 1976 Stiglitz taught at Stanford University as Professor of Economics. Later, he became Professor of Political Economy at All Souls College, University of Oxford, Professor of Economics at Princeton University, and returned to Stanford until 2001. Since then, he presently teaches at Columbia University (Skousen, The Making of Modern Economics: The Lives and Ideas of the Great Thinkers. 462).

     In the late seventies Stiglitz began work on asymmetric information (a type of imperfect information) and its effects on economics. Asymmetric information deals with decisions in transactions where one person has more or better information than the other. The economic models of the day did not account for asymmetry and as a result were not accurate. Stiglitz spent many years studying the effects asymmetric information has on the accuracy of economic models and predictions, his work resulted in the creation of the field of Information Economics and in 2001 Stiglitz became the Economic Nobel Laureate for that year (Simon 306). Every year since 2009, Foreign Policy Magazinehas made a list of the top 100 global thinkers, and every year Joseph Stiglitz has made the list. In 2009 he was number 25, 2010 number 30, and 2011 he was number 33. Joseph Stiglitz has founded one of the leading economics journals, The Journal of Economic Perspectives. He is also chairman of the Brooks World Poverty Institute at Manchester University Manchester. He was appointed to US President Bill Clinton's Council of Economic Advisers in 1993 and served as its chairman from 1995 to 1997. From 1997 to 1999 he was chief economist and senior vice president at the World Bank (Nobel Interview 2001).

As you can see, Joseph Stiglitz is a very successful member of the economic Discourse. His success comes at least partly from his skills-set, a skills-set which is not unlike that of most members of the economic profession. Reading Stiglitz’ autobiography gave me a window into his thought process and allowed me to find out some of what it takes to become an economist. It has also allowed me to notice a lot of similarities between myself and Stiglitz during his early academic years, for example when Stiglitz recalls switching to an economic major, “I thought it provided an opportunity for me to apply my interests and abilities in mathematics to important social problems, and somehow, I thought it would also enable me to combine my interest in history and writing. I wanted it all and economics seemed to have it all”. I share that same inquisitive nature as Stiglitz did when he wondered why the town in which he grew up had such high unemployment and what could be done to fix it. To me that is a major hallmark of an economist - to ask why. To have the desire and the ability to step back and recognize that the issues shared by many individuals in a community (microeconomics) can be caused by imbalances and bad policies of a much larger system (macroeconomics). Researching, writing, and learning about Joseph Stiglitz has deepened my interest to pursue economics professionally.

      The similarities that I have noticed between Joseph Stiglitz and myself helped reassure me that I will succeed in the economics profession after my education. If you do not think you are similar to Stiglitz try looking up biographies of other famous economists to get a feel for who they were and what they did.

Here is link to the website for the Nobel Prize. It is to the section on Joseph Stiglitz and his 2001 award in the field of Economics of Information. I referenced the autobiography throughout this post, and there is also more information on Stiglitz and his contribution.
 http://www.nobelprize.org/nobel_prizes/economics/laureates/2001/stiglitz-autobio.html

What are economists like and what do they do.

       As you already know I have always been interested in studying the economy and learning how to predict it, but up until recently I really hadn't spent that much time thinking about what exactly an economist does in his or her job or who makes a good economist, i.e are there any typical personality traits of an economist? Since the average person will spend a total of 89,784 hours at their job its obviously important to know what you are getting yourself in for if your going to be an economist, so here is what I have learned.

In terms of what an economist says or how an economist writes, economists generally have a somewhat dull unbiased objective tone that is meant to convey only the facts about the topic. Also, according to Diane Coyle, who wrote The Soulful Science: What Economists Really Do and Why It Matters, the lexis of an economist consists mainly of statistical jargon as well as less professional but still industry used conventions (4). Verbal and written reports on economic issues are frequently not understood by public at large and often lack any definite prediction for what the future may hold, often including projections that are vague and have multiple interpretations (247-48). For example in a recent quarterly economic prediction from the Federal Reserve the chairman said, “It's important to note that the Federal Reserve's stress scenario estimates are the outcome of deliberately stringent and conservative assessments under hypothetical, adverse economic conditions and the results are not forecasts or expected outcomes” (US FED March 12)

       In terms of what an economist does in their day to day job, economists study statistical data, including consumer confidence survey data, in order to find trends and correlations in economic markets. According to Daniel B. Klein, who wrote What Do Economists Contribute?, “In recent decades computers have become the cornerstone for economic number crunching, giving access to larger amounts of data which is then fed back into computer simulations to predict the direction of various markets” (147). Economists also look for ways to maximize efficiency of a market or business by cutting down on any wasteful use of labor or materials, they can also notice new trends and aid both the government and private sectors in staying ahead of the curve. Economists work closely with each other and share ideas fairly easily, which leads to a strong sense of community within the profession (152)

       Amusingly, in terms of who an economist is, they often fit the white-collar businessman stereotype. According to The Bureau of Labor Statistics economists are mainly men with at least an undergraduate degree and a graduate degree for the majority of those seeking to advance their career. Work environments are mainly of the office type concentrated in major metropolitan areas, with varying amounts of travel required. Economists have highly structured work schedules and are required to generate a lot of reports. Income varies between $48,000 and $74,000. Generally there is a high level of employee satisfaction among economists (203). Final according to Michael Szenberg, author of Reflections of Eminent Economists, economists have to be team oriented as a lot of their time is spent in groups or committees (263).

       In terms of beliefs and values economists are quite varied. Some are motivated simply by the desire to obtain as much wealth as possible however, according toRobert J. and Virginia M. Shiller, “Economists as Worldly Philosophers”, economists in general can be thought of as moral scientists with the desire to better the lives of everyone. Economists love what they do and enjoy writing and speaking about economic topics. Many believe that economics is sometimes mislabeled as the “dismal science” and seek to inform people of the true goals and merits of economies (3). Those that work in government positions are especially well positioned to aid in the creation of laws and policies which will benefit the most people possible. (8)

 

About Me

Hello I am currently a junior in the Business and Economics degree program at the University of Central Florida. For part of my spring 2012 english class I was asked to express the knowledge I had gained throughout the semester to a larger audience. I chose to write a blog aimed at students like myself who wish to become part of the economic discourse community. The goal of this blog is to help people prepare for various difficulties that may be encountered when trying to enter the economics discourse community.

Growing up I spent a lot of time in an auto repair shop that my father owned, which helped make me into a logic based person that loves to find out what makes things tick. I would always be taking things apart to find out how they worked, and I believe that that interest is the core reason I am interested in economics. I used to believe that like an engine the various markets (parts) that made up an economy (engine) interacted in ways that were predictable and repetitive, and I was really interested in learning how something that happens in one part of the world could have a direct influence on an economy thousands of miles away.

With the education in economics I am receiving and the work I have done for my english class I am beginning to realize that even though people have created all the different systems that make up the economy such as markets, financial institutions, regulatory agencies, etc. the economy as a whole is not something that can be easily controlled. It is like a robot that was built and controlled by its creator but later as its artificial intelligence developed the robot reached a point where it became self-aware and was no longer under the control of its creator.